A lot of you have been asking how to create sellable notes lately. Here are some guidelines. I hope this helps......
Following are the basics, in outline form, of the most secure, saleable (at the lowest discount) seller financed mortgages and notes:
First a Real Estate Sale with seller financing:
- Sell the property to a buyer who will occupy it (called owner occupied).
- Sell the property to a buyer whose mid credit score is at least 625. The higher the better. It's your federal legal right to know all three of their credit scores.
- Sell the property to a buyer who you don't know and isn't related to you. (Called an arm's length transaction).
- Sell the property using a third party processor like an escrow or title company.
- Make sure to buy and receive a valid Title Policy with insurance in the amount of the sales price.
- Take back a mortgage in the first position (the most senior lien) for no more than 85% of the sales price. (you can use a second to achieve the 85% LTV if necessary-ask me how).
- Secure the mortgage or note with a valid Mortgage Deed or Trust Deed on the property.
- Accept no less than 15% cash down payment.
- If the buyer doesn't have 15-20% cash down payment and the sales price is more than you expected, you can carry-back two notes. One in the 1st position for 80% of the sales price and another one, a 2nd position note for no more than 10% of the sales price. These deals are called 80-10-10 (80% 1st position note, 10% 2nd position note and 10% cash). Now you can sell the 1st position note (the most valuable one) and keep the 2nd position note.
- The terms of the 1st position note should include: an interest rate of at least Prime (currently 8.25%); Amortized equally, monthly for up to 30 years; Pre-payment penalty for the first five years; Significant and detailed late and default payment stipulations.
- Keep detailed records, like a Note Owner's Manual, of the note and each payment (preferably a copy of the front and back of the payment check showing the bank cancellation stamp). Preferably a separate checking or savings account for the note.
Next, a Business Sale with seller financing:
- Sell the business to someone experienced in and who will operate it.
- Sell the business to a buyer whose mid credit score is at least 675.
- Sell the business to a buyer you don't know and isn't related to you.
- Sell the business as an 'Asset Sale' instead of a Corp Stock or Equity sale if possible.
- Always use legal professionals (business attorney, escrow, Title company, etc.) to construct and execute the sale and documents.
- File and record a UCC-1 following the close of sale.
- Sell to a buyer with at least 30% cash down payment.
- Make sure the business can afford to support (pay) the note payments from its cash flow because you will be depending on the business to perform on the note.
- Carry-back only a 1st position promissory note.
- If real estate is involved in the sale, create two notes. One on the business and one on the real estate. (A business note is far more valuable without real estate).
- Receive a Personal Guarantee from the buyer even if the buyer is a corporation. It is added value if the Personal Guarantee is secured with defined, tangible collateral outside the business and equal to the amount of the note.
- Receive a Security Agreement.
- Receive proof of exactly the cash down payment paid.
- Make sure you have a signed Bill of Sale.
- The terms of the carry-back note should include: Interest Rate of Prime plus 1%; Balance Amortized equally and monthly for no more than 72 months; Significant and detailed late and default payment stipulations including reversion of the business and assets to you; Non-assignment clause; Full Balance payoff at time of and in case of business subsequent sale.
- Keep detailed records on the business sale transaction; keep your last two years of signed business tax returns; demand that the buyer, now your note payor, provide you periodic (quarterly) Profit and Loss business statements (it's your legal right); keep detailed note payment records (a separate checking account is best).
If you have any questions feel free to call any time.
Marc Faulkner (269)353-9238
Quick service from quote to funding, since 1999......